Home /
Expert Answers /
Finance /
suppose-there-are-two-independent-economic-factors-m1-and-m2-the-risk-pa187

Suppose there are two independent economic factors, $M_{1}$ and $M_{2}$. The risk-free rate is $7%$, and all stocks have independent firmspecific components with a standard deviation of $55%$. Portfolios $A$ and $B$ are both well diversified. Required: What is the expected return-beta relationship in this economy? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

The expected return-beta relationship in this economy is given by the Capital Asset Pricing Model (CAPM):